Endowment Theory - Research Paper Sample

Introduction

Factor endowment is the availability of resources in a country that contributes to manufacturing industries (Shen et al., 2019). The more a country is rich in endowment resources the more likely it will prosper economically. Different countries in the world have natural resources that contribute to their industry. However the resource differed from one country to another, there are countries with more resources than others. The level of exploitation of the resources also plays a role in the benefits that the resources will bring to a country. The factor endowment resources have been identified in economics to include the amount and fertility of the land in a particular country. Labor, capital and businesses also are part of the resources factored in the endowment. Factor endowment theory is the explanation of how a country benefits from the different resources mentioned above; the resources in the theory are rationed to provide the level of effectualness to a country’s economy. The theory is normally used to compare the factor endowment resource of different countries. This paper compares the factor endowment resource of the Kingdom of Saudi Arabia and the United States of America based on the factor endowment theory.

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Impact of Resource Endowments

The United States of America and the Kingdom of Saudi Arabia are two different countries in different geographical locations. They have diverse cultural differences that dictate their economic activities, there are also different levels of developments. However, there are some of the things that are similar between the two countries in terms of trade. Nevertheless, there are enough to compare land, capital, labor, and entrepreneurship.

Factor endowment theory as defined in the introduction part covers the natural resources that a country produces as manufactured goods. According to the theory, a country producing a certain product benefits most from the product than the country that imports the product. The most common resources that a country can manufacture are natural; they include minerals, farm produce, fishing, and other natural available resources. In a comparative situation between the two countries, a country with more resources and manufacture more products is likely to be more prosperous than later. Using the example of the united states of America and the Kingdom of Saudi Arabia, The US is enriched with different economic advantages,it is the largest economy in the gross domestic product, it is also one of the leading purchasing country(Shahbaz et al.,2019).

However, the US also economy strength is as a result of the rig natural resources available in the land. It is placed seventh in the natural resource value. It produces and manufactures minerals like gold, silver, copper iron among others. It is also rich in metal production and manufacturing. The resources earn the country capital through foreign exchange, it also provides employment activities to its people. Kingdom of Saudi Arabia is ranked second worth of natural resources.It is rich in resources like petroleum. A mineral that has earned the country foreign exchange for a long time. Despite that its economy is lower than that of the US. The reason is that although the US is not close to Saudi Arabia in natural resources, the US has diversified its economy in different other things like technology. It is one of the leading manufacturers of electrical material which enables it to have a mixed economy.

The theory of endowment theory has an effect on comparative measures in different economies. From the review, Saudi Arabia is second best when it comes to natural resources but is far below the US in economic rank. According to the theory, Saudi Arabia ought to be the second-best economy because of its natural resources. However, nowadays economic studies are not only based on the manufacturing of natural resources. Other factors have been used to determine the economy of a country. For instance, the US is a great buyer of many products but that does not mean that its economy should be compromised, factors like entrepreneurship, labor force, and manufacturing.

Factor-Endowment Theory

The factor of endowment theory can be a good predictor of the trade. However, it has several weaknesses. Many countries' economies are recognized due to a certain resource. Saudi Arabia, for instance, has been identified as one of the biggest economies due to its petroleum product which happens to be part of the resource captured in the theory. Although natural resources cannot be used solely to predict the trade patterns in the economy, it carries a high percentage of determining the trade patterns. The United States of America is a great exporter of metals; it enables the country to trade with other countries that do not produce metals. There are always trade patterns subject to the availability of a product and market. The US is certain to sell its products to countries that do not produce metals and other minerals. The of the trade pattern will continue to provide a consensus that has been reached between the trading countries. The United States also will import petroleum products from Saudi Arabia because they do non manufacture that product. It should not be necessarily Saudi Arabia but it will trade with whoever has the product they need if they can strike a good deal. The pattern of trade allows the producer to meet the consumer as explained in the factor endowment theory.

The theory also has some shortcoming sin predicting the trade patterns. Trades do not involve one item only, some different other goods and services can be traded between countries. The theory focuses only on the common resources that are existing naturally. There are trading activities that are created by a country. Technological advancements have enabled some countries to defy the odds of the theory and changed the pattern of the trades. Referring to the US and Saudi Arabia, each country has developed its trades other than the trades involving natural resources, the US for instance buys some other products from Saudi Arabia that did not exist there but were eventually created. The other trades ensure that two countries can remain in trade even though the common product is no longer traded between them. There are thousands of foreigners working in Saudi Arabia enabling them to get extra income in terms of gross domestic product, some of the workers in Saudi Arabia are American and are contributing to the economy of that country.

Alternative Trading Theories

Apart from the factor endowment theory, other theories can be used to explain the economy of a different nation and how they are determined. The Ricardian theory is a simple theory that can be applied in determining international trade(Rossi, 2017). It has different models that are used to compare trade between different countries. The theory considers different reasons like technological advancement id countries, the difference in demand, resource endowment, and existing government policies. The Ricardian theory argues that the named factors contribute to trading activities among different countries. The formal models provide a comparative advantage of one country to another. A country with advanced technology to produce goods and services stand in a better position in winning profitable trades with most of the countries. The states are a better country when it comes to technology as compared to Saudi Arabia, it has better technique in turning capital, labor, and land into tradable outputs. Government policies like taxes lead to different trading capabilities, governments that impose too much taxes for trading activities are likely to attract fewer countries to trade with, unlike countries that impose less restriction and taxes. Demand preference is also another model that the Ricardian theory considers as a competitive advantage model. Different countries have different demands preferences according to their cultures and their way of life. The United States of America has a different demand preference with Saudi Arabia. The United States is a large consumer of different goods and services as compared with Saudi Arabia.

Insights and Challenges

Kingdom of Saudi Arabia has had different trading initiatives as a way of improving their economy, one of them is the 2030 vision. However, the country has been facing challenges in their trades with the rest of the world. Some challenges are can by political instability that sometimes occurs in the country. Many countries shy away from trading with Saud Arabia because of unpredictable changes that occur in their governance that may lead to new policies that do not favor some countries that are already in a contract. The other challenge is the multilateral rule of trade. Some World Trade Organization agreements pose high tariffs to certain products that make it difficult for other countries to trade the products. An example is an agreement on agriculture that made the agro product facing more trading barriers than industrial goods.

Saudi Vision 2030

Kingdom of Saudi Arabia is concerned about its economy that is why it is putting initiatives on how they can improve it. Its economy is among the top twenty strongest in the entire world. The backbones of Saudi Arabia's economy is oil (Nurunnabi, 2017). Recently the country launched a strategic framework on how it may have different alternatives that the country can rely on it its economy. The framework is the Saudi vision 2030. The main aim of the strategic framework was to reduce the overdependence on oil by Saudi Arabia. The alternatives that were suggested include the tourism sector, the country was able to allow different countries to acquire a visa that enables people visiting Saudi Arabia as tourists bringing foreign exchange. The country also has invested money in the entertainment sector that will contribute to its economy through county music concerts featuring musicians from different countries including the United States of America. The other project that was inclusive to the Saudi vision 2030 is the Red Sea Luxury resort project. The project ought to help create jobs and collect revenue from tourists that will be touring that place. All the projects set in the Vision 2030 are in line with the factor endowment theory. It will enable Saudi Arabia to gain an alternative advantage for economic growth. The country will also be able to compete with other countries that have such opportunities at an equal level; Saudi will have a chance to trade its services to the residence from all over the world through the project.

Conclusion

The economies of the world strive to have the best opportunity for trading. As explained in the factor endowment theory, natural resources play a key role in determining the economy of a country. Using the examples of Saudi Arabia and the United States of America, the two countries have economical differences and similarities, the countries compare in different ways that include natural resources, technology, Gross domestic product, and other endowment resources. However, it is clear that the theory does not capture all the factors that can determine the economy of a country, an example of the Ricardian theory was used to expound on other models that help in contributing to an economy of a country. Saudi Arabia was able to adopt the different ways that can improve its economy by introducing other alternative forms that will enable the country to compete with other countries trade wise and uplift themselves economically.

References

Shen, J. H., Lee, C. C., & Zhang, J. (2019). Comparative Advantage, Endowment Structure, and Trade Imbalances-Theory and Evidence. Endowment Structure and Trade Imbalances-Theory and Evidence.